Suddenly affordability, or rather the lack thereof, has become a popular refrain. From the halls of the White House to the shores of New York City, everyone is talking about the affordability crisis.
New York City Mayor Zohran Mamdani, Virginia Gov. Abigail Spanberger and New Jersey Gov. Michelle Sherrill all campaigned, in whole or in part, on the issue of affordability. Realizing the popularity of the term, President Trump has also jumped on the affordability bandwagon. All these politicians are looking for someone to blame.
It would be helpful in solving the affordability issue if those searching for an answer seized upon the prophetic words of Pogo’s creator, Walt Kelly, who wrote, “We have met the enemy and he is us.” There are no limits to the number of people and programs on both sides of the aisle who are responsible for creating our unaffordability environment.
From 2021-2023 the American economy experienced a burst of inflation. Inflation is not necessarily synonymous with affordability, because inflation refers to a general rise in the overall price level whereas affordability usually references a specific group of goods such as groceries, utilities, etc. Inflation becomes problematic when wages and other sources of income do not keep pace with rising prices. That is what happened in 2022 when consumers realized their purchasing power diminished as the prices they paid formany goods and services rose more rapidly than their income. Washington realized that something had to be done.
Enter the Inflation Reduction Act of 2022, which the Biden Administration said was “designed to make an historic down payment on deficit reduction to fight inflation.” That sounded good and helped by curbing some prices for pharmaceuticals. But there was a problem. The simple definition of inflation is too much money chasing too few goods. The Inflation Reduction Act pumped another $891 billion into an already overheated economy to cover the cost of a variety of the administration‘s pet projects. This is not what a country should do when fighting inflation.
The Trump administration doubled down on inflation by putting into place tariffs on imported products. Tariffs were enacted as a bargaining tool initiated to get the attention of U.S. trading partners which had for years engaged in a variety of unfair trading practices putting America in a less than advantageous position. In the few cases where this has worked, it has the potential to lower prices. However, tariffs are simply a tax. In most instances this tax is passed on to the consumer, thereby raising prices and making the goods and services we buy less affordable.
The Federal Reserve, whose goal is to stabilize prices and optimize overall employment, entered the fray by raising interest rates. The purpose in doing so is to inhibit the velocity or the circulation of money throughout the domestic economy, thereby slowing inflationary tendencies. While this policy works by restricting consumer and business demand, it also tends to raise the cost of borrowing by making credit card payments and mortgages less affordable.
Debt is not limited to consumers alone. For this fiscal year, the projected federal deficit is $1.8 trillion. That amount will be added to the current $39 trillion national debt bringing the total annual cost of servicing that debt this year to $970 billion. Paying interest on this federal debt is in-and-of itself inflationary. The interest payments made by the government increase spending and by so doing also adds to overall inflationfurther raising prices.
And then we shake our heads and ask about affordability. As a country we have relied upon various iterations of fiscal policy (taxing and spending) to remedy our immediate economic and social concerns. By doing so we have often made matters worse. It is simple. We need to spend less and enact tax policies that reduce rather than enlarge the federal deficit. But this will not be an easy strategy for elected officials. They can take some solace in the fact that Europe faces the same problems. Leaders there understand the situation. Their honesty is admirable as captured by Jean-Claude Juncker, former president of the European Commission who said recently, “We all know what to do, we just don’t know how to get reelected, after we have done it.”
This is a contributed opinion column. Michael A. MacDowell is president emeritus of Misericordia University and a director of the Calvin K. Kazanjian Economics Foundation. The views expressed in this piece are those of its individual author, and should not be interpreted as reflecting the views of this publication. Do you have a perspective to share? Learn more about how we handle guest opinion submissions at themorningcall.com/opinions.
